Review your expenses and see where you can reduce spending to reach your goal sooner
Published Jun 30, 2023 • Last updated 2 days ago • 4 minute read
Apartment buildings in Burnaby, B.C. Photo by Jason Payne/PNG By Julie Cazzin with Janet Gray
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. Q: My wife Magda and I are 27 years old and planning to buy a $500,000 condo. Making the down payment of $80,000 is doable, but what’s the best way to save for it? I earn $85,000 annually as a web designer and Magda earns $65,000 annually working in human resources. Right now, we have $10,000 in savings, but all our personal debt is paid off. How can we build a down payment as quickly as possible to buy the condo within two to three years? — Todd R.
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FP Answers: Todd, you can start by keeping some key numbers in mind. The minimum down payment to purchase a home is five per cent, so that would be $25,000 in the case of a $500,000 condo. Your planned $80,000 would be a 16-per-cent down payment on the same property.
But if you buy a home with a down payment of less than 20 per cent, you’ll need mortgage loan insurance, which is available through your mortgage lender. It protects your lender in case you can’t make your mortgage payments.
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Article content Mortgage insurance is calculated on a sliding scale that decreases as your down payment increases. If the home costs more than $500,000, you’ll need a minimum of five per cent down on the first $500,000 and 10 per cent down on the remainder.
The lender pays an insurance premium on the mortgage loan insurance, which is calculated as a percentage of the mortgage and is based on the size of your down payment. Your lender will likely pass this cost on to you, which you can pay in a lump sum or add to your mortgage and include in your payments. Most buyers choose to add it to their mortgage.
Lenders use two ratios to calculate house affordability. As a good rule, total monthly housing costs — including principal, interest, property taxes, heating plus 50 per cent of applicable condominium fees —shouldn’t represent more than 32 per cent of your gross household income. This is known as the gross debt service (GDS) ratio.
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Article content In your case, your gross household income is $150,000, so your total monthly housing costs shouldn’t exceed $48,000 — or $4,000 a month. You also need to budget 1.5 per cent to four per cent of the purchase price for expenses such as legal fees, land transfer tax if applicable, as well as GST and PST as applicable.
I recommend you speak to a mortgage lender or broker as soon as possible to see what mortgage amount you pre-qualify for. This will give you a good idea of what you will be able to afford, as well as a more precise amount of what the down payment needed will be and a rough estimate of what the monthly mortgage payments could be.
Now, let’s talk about how to boost your savings to prepare for the down payment. Your current incomes after income taxes leave you about $120,000 per year, or $10,000 monthly, for all expenses. If you can save $3,000 a month for 24 months, you would have $72,000. Alternatively, $2,000 a month for 36 months would achieve the same goal. You have already saved $10,000, so you’d be at your $80,000 down payment goal.
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Article content Review your expenses and see where you can reduce spending to reach your goal sooner. You may choose to scale down eating out or ordering in, eliminate a vacation or decrease what you spend on incidentals such as clothes, shoes and gifts. And save the down payment money in a high-interest savings account.
You can also check out the savings programs available to you if you qualify as a first-time homebuyer. One to consider is the First-Time Home Buyer Incentive. It helps qualified first-time homebuyers reduce their monthly mortgage payments without adding to their financial burden.
This is a shared-equity mortgage with the Government of Canada that offers: five per cent or 10 per cent for a first-time buyer’s purchase of a newly constructed home; five per cent for a first-time buyer’s purchase of a resale (existing) home; or five per cent for a first-time buyer’s purchase of a new or resale mobile or manufactured home
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Article content The shared equity component of the incentive means the government shares in both the upside and downside of the property value, up to a maximum gain or loss equal to eight per cent per annum (not compounded) on the incentive amount from the date of advance to the time of repayment.
The homebuyer must repay the incentive after 25 years or when the property is sold, whichever comes first. The homebuyer can also repay the incentive in full at any time without a pre-payment penalty. Other savings programs include the following:
The First-Time Home Buyers’ Tax Credit allows eligible homebuyers to claim a $10,000 non-refundable income tax credit. This could result in tax savings of up to $1,500 in the year you claim it. You can split the amount with your spouse or common-law partner, but your combined total claims must not exceed $10,000.
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Article content Can we retire in 7 years at 55 though we have a $525,000 mortgage now? Can opening a joint investment account with my teen reduce taxes? What’s the best way to use RRSP room from rental income? The Home Buyers’ Plan allows you to withdraw up to $35,000 from your registered retirement savings plan tax free. You must repay the amount within 15 years.
The first home savings account (FHSA) is a registered account for first-time homebuyers to save up to $8,000 per year to a maximum contribution limit of $40,000. Contributions to an FHSA are tax deductible and income and gains inside an FHSA as well as withdrawals are tax free. Check with your financial institution for more details about your eligibility.
Janet Gray is an advice-only certified financial planner with Money Coaches Canada in Ottawa
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